Ones to Watch, 9 April 2018

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Americas: Electoral uncertainty to increase following Lula’s arrest

Sectors: allKey Risks:policy continuity; political stability

In Brazil, unprecedented levels of uncertainty over who will win the presidency on 7 October will increase following the arrest of former president and frontrunner Luiz Inacio Lula da Silva on 7 April. Lula had until 5PM on 6 April to hand himself over to federal authorities to begin serving a 12-year prison sentence for corruption but defied the court deadline and gave a speech outside the steelworkers’ union in Sao Paulo. Lula’s supporters have already set up a camp close to the prison where he is being held in the southern city of Curitiba. Although Lula could technically still run for president, the chances of him doing so have significantly decreased. The leftist Workers’ Party has yet to announce who would replace his candidacy, with former Sao Paulo mayor Fernando Haddad a likely candidate. Tension and uncertainty will persist.

Asia-Pacific: Rumours swirl that Chinese market access reforms to be announced at Boao

Sectors:allKey Risks:trade wars; foreign investment

Each year the hype surrounding the Boao Forum in Hainan grows, but this year the expectation that the event, sometimes viewed as the ‘Davos of the East’, will see major announcements are particularly high. Speculation is rife that at his keynote speech at the event on 10 April, China’s President Xi Jinping will unveil a series of market access reforms that finally make good on promises made back in the 13th Five Year Plan in 2015. A timely announcement that China’s market would become more open to foreign companies would go a long way to alleviating tensions that built between Washington and Beijing last week, with the United States threatening US$160bln of tariffs against Chinese imports and China promising to retaliate with US$50bln of tariffs in return. Neither country, nor global markets, would like to see a trade war. Chinese concessions at Baao would save face for both countries and allow for a welcome de-escalation.

Eurasia: new US sanctions on Russian companies felt globally

Sectors: allKey Risks: non-payment

The US introduced its most impactful sanctions in three years against Russian businesses on 6 April, targeting major oligarchs Viktor Vekselberg, Oleg Deripaska, and Suleiman Kerimov, amongst others. Their firms EN+, Rusal, GAZ and Renova were also targeted. Rusal is listed in Hong Kong while EN+ also has a UK listing, as does Kerimov’s Polyus Gold. The measures caused one of the worst days in trading for Russian stocks and also saw other foreign businesses, such as Switzerland’s Sulzer and Oerlikon, lose more than 10 per cent of their market value. China’s CEFC China Energy that helped underwrite EN+’s September 2017 IPO will also suffer. The Russian government has vowed to respond but will likely have to resort to doing so asymmetrically as it does not have similar financial tools it can use to go after the US. The move could also require the Kremlin to ultimately bail out multi-billion dollar firms like Rusal and EN+, which are major employers in some of Russia’s so-called ‘monotowns.’ Finally, it will end Deripaska’s efforts to take over Norilsk Nickel, which he has long feuded with fellow oligarch Vladmir Potanin about.

Europe: Orban easily secures re-election

Sectors:allKey Risks:political instability; protests

Hungarian Prime Minister Viktor Orban’s Fidesz handily won national elections on 8 April, regaining a constitutional majority. In securing a third consecutive term, Orban campaigned largely on anti-immigration rhetoric and alleged the opposition could not manage the economy. Divides amongst centrists and the left meant their main parties performed poorly – the largest, the Socialists, won only 12 per cent of the vote. The far-right Jobbik party finished in second, on 19.9 per cent. The victory may encourage Orban to crack down on the opposition at home, but his complicated relationship with the EU is unlikely to change. Meanwhile, protests on 6 April in Slovakia demanding the government resign were far smaller than previous such demonstrations that were held every Friday since late February, and could indicate the movement has come to an end, for now.

MENA: Further attacks could follow after airstrikes against Homs airbase

Sectors:allKey Risks:all

In the early hours of 9 April in Syria, at least 12 people were killed when airstrikes targeted the Tiyas, or “T-4”, airbase in Homs province at approximately 04:00 local time. The reports coincided with sightings of two suspected Israeli F-15 aircraft over Lebanese airspace. Although the Syrian government first claimed that the attack was carried out by the US, the Israeli Air Force is a more likely perpetrator. The airstrikes follow a 7 April suspected chemical attack in which at least 70 people were killed in Douma in Eastern Ghouta. The United Nations Security Council will meet on 9 April to discuss the reports, which have not been independently verified. Airstrikes by the US and Israel could follow in the coming days although will have little impact on the civil war in Syria nor hinder the progress of government forces.

Sub-Saharan Africa: Concerns mount over Zambia’s debt

Sectors: allKey Risks: debt distress

There are growing concerns over Zambia’s rising debt levels. Loans, including three Eurobond issuances since 2012, have officially taken external debt to around US$8.7bln, but media reports suggest lenders are concerned that the actual figure may in fact be more than double the amount claimed by the government. While it has been reported by Bloomberg that there is no concrete evidence to suggest the government has concealed loans, conflicting figures have been put forward by the finance minister and her predecessor. In one parliamentary session, former minister Felix Mutati said external debt had increased to US$17.2bln, before later saying the figure was in fact US$10bln less. High debt levels continue to affect talks with the IMF over a US$1.3bln loan, while the government is desperately seeking to restructure Chinese-backed loans and reportedly wishes to do the same with its Eurobonds. Greater scrutiny of Zambia’s finances by international lenders is likely to follow.

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